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What's in it for us? Network effects and bank payment innovation

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Author Info
Milne , Alistair () (Faculty of Finance, Cass Business School and Bank of Finland)
Abstract

The developed world exhibits substantial but poorly understood differences in the efficiency and quality of low-value payment services. This paper compares payments arrangements in the UK, Norway, Swe-den, and Finland, and discusses the impact of network effects on incentives to adopt new payments tech-nology. A model is presented, in which private benefits for investment in shared inter-bank payments in-frastructure are weak. In contrast, due to ‘account externalities’, there are strong incentives for investment in intra-bank payment systems. These two features, distinguishing bank payments from other network in-dustries, can help explain some of the observed cross country differences in payments arrangements.

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Publisher Info
Paper provided by Bank of Finland in its series Research Discussion Papers with number 16/2005.

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Length: 32 pages
Date of creation: 11 Jul 2005
Date of revision:
Handle: RePEc:hhs:bofrdp:2005_016

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Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
Web page: http://www.bof.fi/en/tutkimus
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Related research
Keywords: network effects; incentives; payment technology; externalities;

Find related papers by JEL classification:
G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages
L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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References listed on IDEAS
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    Other versions:
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  4. Sujit Chakravorti & Roberto Roson, 2006. "Platform Competition in Two-Sided Markets: The Case of Payment Networks," Review of Network Economics, Concept Economics, vol. 5(1), pages 118-143, March. [Downloadable!]
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  5. Daniel A. Ackerberg & Gautam Gowrisankaran, 2006. "Quantifying Equilibrium Network Externalities in the ACH Banking Industry," NBER Working Papers 12488, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  6. Kenneth Arrow, 1962. "Economic Welfare and the Allocation of Resources for Invention," NBER Chapters, in: The Rate and Direction of Inventive Activity: Economic and Social Factors, pages 609-626 National Bureau of Economic Research, Inc. [Downloadable!]
  7. Dasgupta, Partha & Stiglitz, Joseph, 1980. "Industrial Structure and the Nature of Innovative Activity," Economic Journal, Royal Economic Society, vol. 90(358), pages 266-93, June. [Downloadable!] (restricted)
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  9. Graeme Guthrie & Julian Wright, 2003. "Competing Payment Schemes," Departmental Working Papers wp0311, National University of Singapore, Department of Economics. [Downloadable!]
  10. Joseph Farrell & Garth Saloner, 1984. "Standardization, Compatibility and Innovation," Working papers 345, Massachusetts Institute of Technology (MIT), Department of Economics.
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